What’s Next For UPS Stock After A Dismal Q2?

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UPS: United Parcel Service logo
UPS
United Parcel Service

UPS (NYSE: UPS) recently reported its Q2 results, with revenues and earnings missing the street estimates. The company reported revenue of $21.8 billion and adjusted earnings of $1.79 per share, compared to the consensus estimates of $22.2 billion and $1.99, respectively. In this note, we discuss UPS’ stock performance, key takeaways from its recent results, and valuation.

Firstly, let us look at its stock performance. UPS stock has seen a decline of 15% from levels of $150 in early January 2021 to around $125 now, vs. an increase of about 45% for the S&P 500 over this period. However, the decrease in UPS stock has been far from consistent. Returns for the stock were 30% in 2021, -16% in 2022, and -6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that UPS underperformed the S&P in 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Industrials sector including GE, CAT, and RTX, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

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Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could UPS face a similar situation as it did in 2023 and underperform the S&P over the next 12 months — or will it see a recovery? From a valuation perspective, UPS stock looks like it has some room for growth. We estimate UPS’s valuation to be $151 per share, reflecting an upside of over 15% from its current levels of $127. Our forecast is based on a 19x P/E multiple for UPS and expected earnings of $7.96 on a per-share and adjusted basis for the full year 2024. The 19x figure aligns with the stock’s average P/E ratio over the last three years.

UPS’s revenue of $21.8 billion in Q2 was down 1% y-o-y, amid a weak freight demand environment. Supply Chain Solutions segment sales were up 2.6%, while the U.S. Domestic Package sales were down 1.9% and the International sales declined 1%. The company saw a rebound in domestic volumes, with the U.S. Domestic average daily package volume up 0.7%. However, international volume was down 2.9% y-o-y. The average revenue per piece for the U.S. Domestic packages was down 2.6% and down 1.7% for international packages. The consolidated adjusted operating margin stood at 9.5%. Looking at the bottom line, adjusted EPS plunged 29.5% y-o-y to $1.79 in Q2 2024. UPS lowered its 2024 revenue outlook to $93 billion, versus its prior-guidance of $92 billion to $94.5 billion. Furthermore, it lowered its adjusted operating profit margin outlook from 10.3% at the mid-point of the earlier provided range to 9.4% now.

Overall, UPS delivered a downbeat Q2 with a downward revision to its full-year outlook and this did not sit well with the investors, evident from a 12% fall in its stock in the last five days. That said, from a valuation perspective, we think after its recent decline, UPS stock appears to have some room for growth. Also, a rebound in the U.S. volumes is a positive takeaway from the company’s latest results.

While UPS stock may have some room for growth, it is helpful to see how UPS’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

 Returns Jul 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 UPS Return -7% -17% 42%
 S&P 500 Return -1% 14% 142%
 Trefis Reinforced Value Portfolio -1% 6% 684%

[1] Returns as of 7/26/2024
[2] Cumulative total returns since the end of 2016

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